With natural catastrophe events becoming more frequent and more severe, many insurers are looking for ways to ensure that their portfolios are properly covered. Total losses are on the rise, and coverage gaps can mean a higher potential for litigation. With access to data on accurate and relevant property characteristics, insurers can make sure their policyholders are protected when these events do occur.
A huge component of ensuring that policyholders have adequate protection is the concept of “insuring to value.” In simple terms, this means making sure that the policy covers 100% of the value of what is being insured. Failing to meet 100% creates coverage gaps—otherwise known as underinsurance.
Underinsurance is especially a challenge when it comes to wildfire events, where many homeowners will have their entire home burned down. This is called a total loss. If a home takes $300,000 to reconstruct but the insurance policy only understands the home to be worth $250,000, the homeowner is left with a $50,000 out-of-pocket expense.
That’s why, on the underwriting side of insurance, it is critical to quote policies accurately and insure to value.
Best and Worst Practices
However, there are two practices in quoting that can create inaccuracies with coverage:
Insurers will sometimes use arbitrary coverage cushions. However, unnecessarily inflated coverage means potentially missing out on new customers, missed sales targets and lost market share.
Insurers will sometimes use low premiums as an aggressive tactic to gain new business (and who wouldn’t want lower premiums?). However, this tactic often has a net result of less premium dollars brought in per policy. Moreover, in the event of a claim, premiums that are too low are far more likely to result in a poor customer experience, especially in the event of a total loss where policyholders may not be properly covered. This can deal significant damage to an insurer’s brand. Given that total losses are becoming more frequent with wildfires, floods, and severe convective storms across the country, quoting below what is realistic is not an option that insurers can afford to take.
Underwriters need to make sure that they capture accurate and relevant property characteristics that can be input into their insurance to value (ITV) calculation, significantly preferable to arbitrarily cushioning or lowering quotes.
The Value of Property Characteristics
Accurate and relevant property characteristics can also be utilized in the policy renewal process. During these renewals, many insurers will often apply inflation factors for their price adjustments. This is significantly less effective than doing a full recalculation of the policy. Moreover, it restricts insurers from collecting any updated property characteristic information such as home additions, remodels, and other home improvements or building code changes that may have occurred.
One of the biggest upsides to using accurate, current and relevant property characteristics is reduced operational expenses due to less back and forth between insurers and policyholders during the quoting process. Moreover, using updated characteristic data creates a lower risk of coverage gaps, happier policyholders, and a longer average policy life.
As the world’s climate continues to present challenges to communities, it is more important than ever to make sure that we are using all resources available to protect the communities and homes that we love. That includes moving away from imprecise quoting methods and towards underwriting powered by accurate, current and relevant property characteristics.
With these tools, insurers will reduce coverage gaps, make their customers happy, and be better equipped for the ongoing impacts of a changing climate.
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